Fair competition key to Internet success

The key for Lebanon joining the club of fast Internet countries is to uphold “fair competition” among operators while promoting investment in the telecom sector leading to “sustainable innovation.” This requires implementing transparent regulations, equal taxation, and long term licenses to all operators.

Like most industries, telecommunications is driven by competition – a mixture of factors based on price, quality, and service.

Globally, the telecom industry is becoming more and more deregulated to create competition and innovation by reducing or limiting government power over the sector to a “regulatory role” — unlike in Lebanon where the government polices and plays the role of regulator, supplier, and competitor.

Government monopolies – where a single company or group controls all or nearly all of the market for a given type of product or service – are characterized by the lack of competition. This often results in high prices and low quality products, as with mobile services in Lebanon.

Although the traditional telephone is not dead to the industry, telecom is now more about text, images, videos, mobile applications, social gaming… For this, high-speed Internet access is needed.

Liberalizing the telecom sector — internationally and in Lebanon — is key to the growth and competitiveness of the economy. Indeed, liberalization has proven at the international level to attract investments, lead to the development of high-tech services, and create high value added jobs.

In a fair competition market, the same rules and conditions are applied to all participants, and the competitive action of some does not harm the ability of others to compete.

We keep calling for “fair competition” in Lebanon because it doesn’t exist. There is no fair competition between government-owned (Ogero/Alfa/MTC) and private operators.

Fair competition means all operators are given an equal opportunity to compete and offer services or solutions to the consumer. It means all operators are liable to pay identical taxes, are properly licensed and subject to identical rules and regulations.

With fair competition, the Lebanese consumer would have a wider choice of services from different operators, more data plans, more packages, and more competitive prices.

Let’s take the Lebanese example and the current discrepancy between mobile GSM operators and private DSPs and ISPs.

Mobile operators are dedicated to selling GSM services while the DSPs and ISPs sell Data and Internet services. It is unfair competition when mobile operators decide to compete with data operators and offer 3G services – without proper licensing (from the Council of Ministers or licensed frequencies from the Telecommunications Regulatory Authority), and without fiscal obligations. Mobile operators highly cross-subsidize 3G services with Voice profits while data operators are highly taxed, pay for E1s, etc.

The following charts illustrate the extent of unfair competition between the two camps:

Enforcing fair competition on state-owned operators and private sector DSPs and ISPs requires only a few days’ work. We hope the Telecom Ministry and the Regulator insist on fair play before it is too late.

Given unfair competition between government and private operators, when both compete and offer a similar service (WiMAX or Mobi vs. 3G for instance), the cost on the mobile operator is much lower (see graph below).

Comparative cost structure of competing services

It is unfair competition because costs to the mobile operator are much lower. Its antenna site rentals are fully subsidized; incremental site electricity overheads are minimal; staff expenses are subsidized at large; bandwidth cost is negligible — compared to $2700/E1 on ISPs; licenses and other taxes don’t exist. Consequently, the private operator is unable to compete and would eventually be forced to exit the market.

Telecom Law 431/2002 in Lebanon and international practice prohibits cross-subsidy of one service by the revenues of another. The regulator — the Telecommunications Regulatory Authority in Lebanon — would put very strict rules to prohibit mobile operators from exploiting their advantage.

In a fair competition environment, the regulator would impose cost accounting per service on Significant Market Power operators (SMPs) — like Ogero, Alfa, MTC — so as not to subsidize the 3G service’s staff and site rental costs. The regulator would also impose equal taxes – in Lebanon it is currently 59% on private DSPs while zero on mobile operators.

To illustrate the gravity of unfair competition even more, we can highlight the following example: Assuming the data operator offers WiMAX 2.0 which brings faster and superior service than the mobile operator’s 3G service, given the fiscal, cross-subsidies and cost advantages, mobile operators can introduce their service at half the cost. DSPs and ISPs would go bankrupt and exit the market, leaving the consumer with only one choice: the mobile operator!

The first reaction from a consumer’s perspective would mainly be positive and welcoming. However, it is the total opposite as this removes the consumer’s basic right to choose. We believe that only through “fair competition” that we can safeguard the consumer’s right to choose the best service at the best price.

A happy consumer is what keeps operators and the telecom sector going. Consumers should have a variety of options provided by multiple mobile operators, DSPs, and ISPs from which to choose. Choice gives the consumer value added services, alternative data plans, package variety, quality of services and most importantly, competitive prices.

Multiple operators = choices = a happy customer

Under a de-facto monopoly, however, government-owned operators have control over basic services, data plans, quality, and price. They determine the terms of access to the consumer. In our previous blog post, Waiting for Lebanon’s Internet Godot, we explained why the current subscription costs are so expensive in Lebanon. It is because of the high cost of the international Internet feed, which comes from only one source: the monopoly.

Fiscal and cross-subsidy advantages let SMP operators control the sector and establish a monopoly. Monopolies typically produce fewer goods and services that are sold at higher prices than under fair competition to maximize their profit at the expense of consumer satisfaction.

One mobile operator = no choice = an unhappy customer

Fair competition in the telecom sector in Lebanon is crucial for the economy, innovations, and consumer satisfaction. We again urge Minister Sehnaoui to break the mould and shape the way for the future and implement fair competition. It wouldn’t take the minister long to enforce fair competition and we hope he will turn his attention to this crucial problem for the sector.

Former Minister Gebran Bassil’s focused on that in his May 2009 General Rules and we will continue to strive for fair competition in the telecom sector. It is the only way for Lebanon to take its due place among the top Internet countries. In the fast-moving world of telecommunications technology, we cannot afford to hold back.